Contractual Systems

We understand the complexity of planning, management and construction of major infrastructure and underground projects and the importance of the contractual/procurement process.

Contractual and procurement systems must be well-structured and compatible with the owner’s goals and objectives. This critical link is often neglected or given low priority. Our priority is to balance the contracting and procurement approach with management and technical requirements. Key contractual questions include:

Project management, planning, design and construction are the prime concern of most owners and mangers – but the influence of the associated contractual systems and procurement regulations can be much more significant.

John Reilly’s consulting practice focuses on integrating and balancing contractual and procurement strategies with project management goals and objectives. All must be compatible to meet quality, cost, schedule and other goals.

We believe that there must be a strong alignment of contractual systems with management planning and risk reduction strategies for a project to be successful. We, and our colleagues, have argued this point often – see References – but there is much work yet to be done as the long list of projects embroiled in disputes, claims and litigation – see also Disputes Resolution – has shown.

Specifically, the design and construction industry needs to re-think its contractual approach to complex projects with the associated uncertainties, risks and human fallibilities. Some of the ways this might be done are described below.

Following are thoughts on key issues related to contracting and procurement for complex, public infrastructure and systems projects. We invite you to continue reading and to reflect on the issues raised. Your comments and feedback are welcome.

In a perfect world, a project would come with few restrictions – however, this is far from the case in reality, due to the existence of many specific public policies, political and administrative decisions, public expectations and existing agreements.

Performance vs. prescriptive specifications are the subject of debate and controversy world-wide. The involvement of the owners themselves is not clear in many cases – for example, how active should they be in specifically directing technical, contractual and financial details.

Some owners are directly involved in defining and approving construction details and "means and methods" including, for example, Tunnel Boring Machine characteristics. Others do not get involved in such details.

Owners should understand that one of the factors to be considered in defining "means and methods" – explicitly or implicitly – is the associated liability and risk associated with this decision.

The low-bid environment is often used for publicly-funded infrastructure projects, including those that involve complex and often unknown conditions. It is common practice and/or a legal requirement to award the contract to the "lowest responsible bidder" – often without a serious pre-qualification or evaluation process.

For complicated projects it would be better to exclude bidders who lack the required experience or have insufficient capability to correctly execute the work. Bidders without experience tend to make inadequate bids which then cause problems for them and the owner. In doing this, they lower the price for the work to the disadvantage of more qualified and experienced bidders. The possibility of any successful innovation is also reduced or eliminated.

Using insufficiently qualified bidders and, awarding based only on the lowest price, puts other more qualified contractors under strong competitive pressures. We impose a short time for the evaluation of complex, sometimes unknown, conditions and requirements. Contractors must, under these conditions, devise construction methodologies, determine specialized equipment, develop appropriate applications and also a strategy for profitability – which is a necessary condition for survival.

Bid (Tender) evaluation for award. If, however, there were a better way of evaluating the bids, including the bidder’s qualifications related to the proposed construction methodologies, then a reasonably higher bid from an experienced contractor could be accepted because risks would be reduced, there would be a better chance of schedule compliance, overall cost would likely be lower and there would be a much better chance of the elimination of disputes, claims and litigation.

The owner’s dilemma. – In the words of one owner "The current system results in major problems and cost impacts during construction that can often outweigh any benefits of a low-bid approach. A new system must be seriously considered and implemented."

So, if some owners believe that this is not the best way to contract for complex projects with uncertainty, this means that they believe that they are not in sufficient control of their projects.

This implies that they cannot, and themselves believe they cannot, fully or adequately satisfy their shareholders – normally the Agency Director and the Board of Directors, representing the public taxpayers who fund the projects.

Thus, the stage is set for difficult problems, including unforeseen circumstances and conditions which then lead to disagreements, disputes claims and, eventually contentious litigation with its associated large, totally non-productive costs.

All of these contractually-related concerns must be addressed in context with an overall policy and managerial approach and should be related to technical requirements of the procurement, risk mitigation, disputes resolution, partnering and communication strategies.

For more specifics about contractual systems and procurement strategies, or if you have a project that you would like us to advise on, please contact us at the address displayed below. See also publications and references